A Covid World - Cutting VAT

Rishi Sunak is considering plans for a temporary cut to Value Added Tax (VAT) for some sectors, including the tourism sector - under which pubs, restaurants and hotels fall. Facing the biggest recession in three centuries Sunak needs to weigh up all options to help boost the post-Covid economy. With suggestions from both former chancellors, Alastair Darling and Sajid Javid, to lower the VAT to 17% from the current 20% this would mean £21bn in lost revenue for the Treasury. Can it help stimulate higher sales though?

This change has been rumoured to come about as early as July, following the government changes to the current two-meter social-distancing rule, replaced by the "one-meter plus" guidelines. Cutting the VAT temporarily is not a new idea, but either way not one taken lightly. Former chancellor Alastair Darling made the same move during the 2008 financial crisis to help boost spending and restart the economy.

Sunak has been drawing up plans for his Autumn budget, and with a 20% fall in GDP in April alone, paired with low consumer confidence and social-distancing guidelines, he fears opening the shops from June 15th will have done little to restart the economy. Rishi Sunak thinks “The issue is not so much that they don’t have the cash, because they’ve been saving over the last few months, it’s whether they have the confidence”, but is this true for hospitality staff? Consider your hourly paid staff of which there are nearly 1 million in the UK, on 80% furlough, living in city centres with high rents and living costs, and not supplementing their income with tips and service charge. Not as many have managed to save during the lockdown as the government seems to think. But an overall lower cost of products due to a slashed VAT could encourage spending for those who may not otherwise not see the affordability of resuming their normal habits, especially those still furloughed.

Prime Minister Boris Johnson announced which sectors can resume trading on July 4th, including detailed guidelines on how to re-open and lowering the required social distancing measure to one meter plus. Although our industry - pubs, restaurants and hotels - is included in this list, Downing Street has made it clear that if there was to be another spike in Covid-19 cases this easing of safety measures would be reversed. But can we afford another shut down? Not just on local and business level, but as a country?

Sunak and The Treasury will most likely monitor the consumer spending levels since reopening retail to see if the public actually needs a tax cut to encourage spending, following the likes of Germany, or are we all so desperate to get back to a normal life that we will go out and spend like before?

And will this cut in VAT actually have an impact? In theory yes. Cutting VAT and income tax, especially for low earners, could boost consumer demand and consumption as things become more affordable, but it’s not just that simple, there are so many other factors that will affect the rate at which our economy bounces back. Kate Nichols, Chief of UKHospitality, has warned that even with relaxing of the social-distancing to one-meter it is estimated that around two-thirds of businesses will not be able to operate profitably.

But with every bit of help we get now, the country will need to bounce back. The Treasury has previously stated that public finances are stretched and that eventually fiscal tightening would be necessary in the forms of spending cuts or increases in taxes. The reduction of VAT is an obvious catalyst for getting the economy started again, and with loosening of lockdown restriction a VAT reduction of at least 2% seems likely in July.

A bit more hope for our hospitality industry!

All information included in this post is valid as of date of publication, 26th June 2020.